ADVOCACY

Track & Trace

Track and trace is a system for monitoring the production and distribution of tobacco products, with the aim of combatting the illegal trade of tobacco products in Europe – a crucial effort for protecting European citizens. The 2014 EU Tobacco Products Directive (“TPD”) requires that such a system be established by 2019 for cigarettes and fine­‐cut tobacco placed on the EU market, and by 2024 for other tobacco products.

In line with Articles 15 and 16 of the TPD, the European Commission published in September 2017 three draft acts, detailing how an EU-­wide track and trace system will be implemented, including the use of security features and a unique identifier.

Under the combined proposal, each tobacco packaging unit will be scanned up to five times before it is placed on the market.This process will require unprecedented data transfers and a very performant IT infrastructure, which will take time to design and, more importantly, to test.

Tracking and tracing tobacco products in the EU will require monitoring the movements of around 29 billion packaging units per year, or 80 million units per day.

From a technical perspective, the Commission’s draft proposal lacks in coherence, setting standards where no competency exists while failing to set standards where these are mandated and badly needed. Where it correctly sets standards, many are too complex, making them unlikely to be internationally shared. The Decision on packaging security features, for example, completely ignores the harmonisation purpose of the 2014 TPD by not setting uniform standards.

The proposed system will therefore be prohibitively costly and unworkable for mid‐sized and smaller firms. It obliges all companies in the tobacco supply chain to reorganise and modify their business and trading practices beyond what is necessary to establish a well-functioning track and trace system, as specified in the TPD.

In particular, there are three main flaws in the Commission’s draft proposal for a track and trace system that must be overcome in order to effectively fight against illegal trade. These are: (i) the status of export goods in the system; (ii) the generation and application of a unique identifier; and (iii) security features allowing uniform application throughout the EU.

Tobacco products for export are excluded from the TPD, and must also be excluded from the implementing acts. Forcing export products to comply with the system will mean they cannot be sold in third countries with restrictive packaging regulations, such as Australia. While large manufacturers will be able to get around this by relocating manufacturing outside of the EU and thus reducing European jobs, smaller and family-owned businesses cannot relocate operations as easily, and would hence be disproportionately affected by such a market distortion and self-imposed barrier to trade.

The draft Regulation requires Member States to ensure that all unit packets of tobacco products are marked with an irremovable unique identifier (UI), which will integrate data relating to the product itself, its manufacturing process, distribution and financial information. At present, the Regulation mandates that production cannot commence until these UIs have been received from a single government-­selected issuer, effectively transforming the market into a State-­directed enterprise. Furthermore, the draft Regulation goes further than the TPD, increasing the length of the UI and departing from international standards.

The draft Decision calls for too many security features, undermining the harmonisation objective of the TPD. For example, the number of required authentication elements should be limited to three instead of the proposed five. Even though the issue of illegal trade is mostly related to cigarettes, the requirements of the TPD will apply to all tobacco products. But the draft Regulation fails to account for this difference, and for the specificities of smaller companies and the packaging size of niche tobacco products such as nasal snuff and chewing tobacco.

For smaller companies manufacturing tobacco products other than cigarettes, the cost of enacting a track and trace system will be 10 to 15 times higher per unit produced than for large-scale cigarette makers.

Rather than listing compliant technologies, the proposal must set uniform standards and simplify the requirements for the security feature. The EU could also improve its proposed track and trace system for tobacco products sold in Europe by acknowledging other existing and efficient tools, such as the Excise Movement Control System used in monitoring excise goods intended for export.

Tracking, Tracing & Authentication

The track and trace system proposed by the European Commission is unnecessarily costly, burdensome and complicated, both for those involved in the industry and EU Member States. By purposely pursuing an infeasible policy option, the Commission is exceeding its mandate in certain areas, while failing to provide the legal clarity required by the EU’s own Tobacco Products Directive (“TPD”) under Articles 15 and 16.

The proposed system is multiplying third parties and increasing the bureaucratic burden and costs for operators and Member States. The burdensome proposal also shows a lack of understanding of trading practices. By making it virtually impossible for smaller and mid-­sized companies to survive in the market, it would further concentrate the market in the hands of the largest companies. The proposed governance model for the track and trace system will also perversely stand in the way of establishing an EU-­wide surveillance system to combat the illegal sale of tobacco.

Unique Identifier (UID)

The Commission’s proposal mandates that all tobacco products must have a unique identifier (UI) on the pack to comply with the tracking, tracing and authentication requirements. The draft Regulation proposal to issue UIs for products before production takes place is unworkable for smaller producers. The UI ignores the particular requirements of niche products such as traditional European snuff, which is packaged in small containers. Constant changes to the rules would require entire product packaging lines to be rebuilt, leading to economic waste.

While the Commission correctly understands that the timestamp can only be applied on the packaging line as individual unit packages are produced, it has proposed that the timestamp be added separately to the UI, which must be requested in advance of production. Unless the UI and timestamp are created at the same time, the timestamp can never form part of the unique identifier, as clearly specified in the Directive.

In order to avoid these issues, the UI should be generated and applied at the time of packaging. The choice of ID issuer should also be led by manufacturers, according to standards set and audited by the Commission. This is the only way to avoid unnecessary complexity and to comply with the TPD.

The UI requirement in the draft Regulation will also capture products for export outside the EU. This would severely distort a vital market for European tobacco companies, such as fine-­cut tobacco producers that manufacture in western Europe for a global customer base. A number of third countries, such as Australia, have regulations insisting that only approved national markings appear on packaging. Under the proposed rules, tobacco products made in the EU would be effectively banned from these countries, thereby undermining European manufacturers and distorting competition. While large operators could move their facilities outside of the EU, the cost of this would be prohibitive for smaller producers, hence leading to further consolidation within the sector.

Security Features

The proposed security features are too diverse and complex to be practical in the fight against illegal trade. While a combination of overt and covert authentication elements is most effective in tackling counterfeit goods and Intellectual Property Rights infringement, the combination of five of them is disproportional and unrealistic, especially for products that are often packaged in very small sizes. The structure of the security feature and authentication elements should be compatible with current packaging materials used for traditional and niche tobacco products, which are mainly manufactured by smaller and mid-sized companies. By not acknowledging these limitations, the Commission’s draft decision threatens smaller operators, and would lead to further consolidation of the sector.

The Commission’s draft proposal also mandates the introduction of an anti-tampering device on production lines, supplied by an independent commercial third party. The introduction of an anti‐tampering device, besides increasing the complexity of the system, cannot be simultaneously integrated into the packaging line and be independent from the manufacturers. Furthermore, this provision is not even included in the Tobacco Products Directive. This overstep of the Commission’s mandate raises legal and liability concerns, and fails to ensure compliance with European competition laws.

The Commission’s proposal wrongly assumes that manufacturers can themselves complete tax stamps with additional types of authentication elements, if so lacking. In all national jurisdictions, tax stamps can only be applied without further changes and the Directive does not allow any tax stamp as the security feature if they do not comply with all the standards set by the Implementing Decision. Tax stamps cannot therefore be complemented with authentication elements by the manufacturer, as the draft Decision suggests.

In the few Member States that are not using tax stamps, smaller and mid­‐sized companies will be disadvantaged as they will have to bear the full cost of the technologies for the combination of five authentication elements. In the 22 other Member States using tax stamps, the cost of compliance upgrades will be supported by the State, if tax stamps are used as the security feature.

Impact on Small and Mid-­Sized Firms

It is essential for any track and trace system to reflect industry practice and the different specifications of different markets. In particular, the system must be sensitive to the practices of smaller and mid-­sized firms, which have different business models, production methods and modes of distribution compared to larger cigarette manufacturers.

The Commission has so far failed to take account of market realities in its track and trace proposal, particularly for smaller producers. Despite indicating that companies can start preparing for the system’s entry into force, the draft Regulation fails to provide the necessary details and specifications for companies to start preparing, such as adequately specifying the security features to be placed on tobacco packaging, or the selection of a third party for an anti-­tampering device.

Furthermore, smaller companies often do not produce enough of a single product and ship their products in mixed consignments of different goods. The proposed track and trace system would be very time consuming and costly for this type of distribution and disproportionately disruptive for small and mid-­sized companies generally, whether they are manufacturers, importers, wholesalers or distributors.

Implementation

Implementing a track and trace system demands significant changes in manufacturer hardware and software, a new database architecture, and multiple changes to production lines. The requirements for the data carrier specified in the draft Regulation are incompatible with current printing technologies, machinery and GS1 standards in use.

The Commission has ruled out pre-­implementation tests and ignored the inevitable risk of technical failure in its proposal. In doing so, the EU’s approach to creating a track and trace system is seriously misguided, and must be reconsidered in order to be viable.

ESTA members manufacture fine‑cut tobacco, pipe tobacco, traditional European nasal snuff and chewing tobaccos in 10 Member States and export their products across the entire world. Skilled craftspeople expertly apply age old techniques, perfecting the mixture of dozens of varieties, tastes, smells and flavours, continuing a centuries‑old tradition of fine European heritage. Up to the end of the last century, the manufacture of tobacco in Europe encompassed hundreds of small producers creating thousands of signature products. Over the past 30 years, smaller firms have been acquired by larger multinational companies or have ceased activities altogether, leading to employment reductions and the disappearance of traditional brands. In the manufacturing countries, tobacco production is often rooted in less advantaged regions and plays locally a key economic and social role. It deserves protection and at the minimum should be considered when developing regulation.

Between 2008 and 2012, consumption of fine-cut tobacco in the EU28 increased by 37%, even though the increase varies heavily per Member State. Because of the severe economic crisis, consumer disposable income was under pressure, impacting the growth of fine-cut tobacco consumption. This increase demonstrates the price sensitivity of fine-cut tobacco smokers.

As the economic crisis subsided between 2012 and 2015, fine-cut tobacco consumption declined in the EU and the market adjusted, returning to its pre-crisis normal order.

In 2016, sales of fine-cut tobacco kept declining by 1.09% in the EU28. This long=term downward trend follows to an extent industry consolidation.

Seemingly out of step, several eastern countries still experience percentage increases in fine-cut tobacco sales whilst starting at very low sales levels. This demonstrates the buffer function of fine-cut tobacco: cigarette consumers who can no longer afford this product find in fine-cut tobacco a legal alternative to illegal cigarettes that are often smuggled from neighbouring countries outside the EU (see London Economics Study, June 2015).

Sometimes fine-cut tobacco is mistakenly presented as a “hook” to smoking because of its relatively higher affordability when compared to cigarettes.

The reality of the market shows a very different picture. In most European countries, fine-cut tobacco was and still is a niche tobacco product enjoyed by “specialist” consumers and traditional tobacco enthusiasts who enjoy fine European craftsmanship.

Few exceptions exist with high market shares in countries where fine-cut tobacco has a long history and forms part of the cultural heritage. In these specialised tobacco markets, the significance of fine-cut tobacco stems from its century-old local manufacturing.

Every year, taxes on tobacco products raise more than €100 billion for EU governments. Tobacco tax policy must be delicately balanced to safeguard government revenues, protect fair competition, jobs and public health, whilst also deterring trade in illegal tobacco. Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. The fight against illegally traded tobacco is part of a wider effort to protect EU citizens.

A successful implementation of Track & Trace will be of crucial importance, and requires workable standards that fit business and trading practices, making them likely to be internationally shared.

The EU is characterised by a very diverse and flexible excise structure, which allows each Member State to set a balanced taxation of tobacco products respecting its national circumstances, interests and objectives. Last year, excise revenues from smoking tobacco increased across the EU, even though sales declined. This clearly demonstrates the efficiency of the current flexibility left to national governments and that a “one size fits all” approach should not be considered. The few Member States (e.g. France, Netherlands) casting economic theory and the tax-bearing capacity of smoking tobacco aside had adverse effects with declining revenues whilst sales increased.

An obvious correlation exists between the highest levels of illegal and non-­domestic consumption (e.g. France, UK, Ireland, Poland and Finland) and the highest taxation rates applied to fine-cut toconsbacco, in comparison with cigarettes. The figures clearly show that any alignment of tobacco taxation, regardless of the products’ specificities, will prevent fine-cut tobacco from fulfilling its buffer function, leading to increased illegal trade of cigarettes and driving down government revenues.